 Our next speaker is Dr. Peter Klein. Peter teaches economics at the University of Missouri, author of a number of books and important papers. But to me, the best news about him, at least recently, is the fact that he's the new executive director of the Institute and he's at Missouri for the rest of this year and then he'll be coming full-time to Auburn at the end of June and we're very glad to have him. I could tell a lot of stories about Peter but I'll just mention that in 1988, he was graduating from Chapel Hill and going to Berkeley to get his PhD in economics and he wanted some help and probably some comradeship too. He sent a letter and I called Murray Rothbard and I said, Murray, I've just gotten the most extraordinary letter I've ever seen from a student. I said, this kid is amazing. May I fax this to you and if you agree, would you talk to him? Because Murray began Peter's association with the Institute and he's been quite extraordinary. He worked closely with Murray, Bert Blumert and others and we're very proud of him. I sort of feel paternal towards him. I could tell a number of stories but I'll just add one more. Peter got his PhD. He was invited because of a member of the Berkeley faculty to spend a year of internship on Bill Clinton's Council of Economic Advisors in Washington. So one day I got a visit from the FBI. The FBI from their Opelika office who knew the FBI had an Opelika Alabama office. So they said we're doing background check on Peter Klein security check and we'd like to talk to you about him concerning his internship and I said, but his internship ended about three months ago. And the guy said, you know the government. I said, well, okay. I do know the government. So expect more great things from Peter in terms of all the work he's going to do for the Institute and he's going to talk to us now about interstate highways, radar and Tang. Does war provide and promote technological innovation? Dr. Klein. It's been a privilege to be associated with the Mises Institute for 24 years now and I'm looking forward to many more years of successful collaboration. Many of you remember several weeks ago President Obama got himself in a little bit of trouble for uttering the now infamous remark. You didn't build that referring to entrepreneurs who create small businesses. Now the President's defenders immediately pointed out that in context the President was not meaning to denigrate small business owners or to indicate a lack of appreciation for entrepreneurship but rather the President was trying to highlight the critical role of government spending in creating the environment in which entrepreneurship and small business can thrive. The President's remarks were as follows. He said, somebody helped to create this unbelievable American system that we have that allowed you to thrive, small business people. Somebody invested in roads and bridges. If you've got a business, you didn't build that. Somebody else made that happen. The Internet didn't get invented on its own. Government research created the Internet so that all the companies could make money off the Internet. In other words, according to the President, lots of people benefit from government spending including you tech entrepreneurs who use the Internet to innovate and to create value for consumers. Of course when the President says somebody built these roads and bridges somebody made these investments. Of course he means the state. The state is the somebody that according to the President is sort of making everything happen. In context, I think the President's remarks are even worse than they were made out to be by the Romney camp and the President's critics. What Obama is getting at is a very popular fallacy. That's this notion that government spending on scientific research and on technological development is critical to scientific progress, technological progress and to economic progress. This share is viewed by almost all mainstream social scientists and most politicians of course. Even scholars who are otherwise favorably disposed to the free market will argue that some goods and services such as basic scientific research and even a lot of applied research and development have certain characteristics. There are so-called public goods which the free market cannot provide and must be therefore provided by the state. Now a general critique of this public goods argument will have to wait for another day. A number of economists from the Austrian school and elsewhere have shown pretty convincingly that this is a very poor rationale for government spending. But today I want to focus specifically on this argument that government spending on science and on technology is vital for technological and economic progress. This argument, it's often been pointed out, is used as a rationale to justify not only war but the establishment of a sort of permanent military-industrial complex. One benefit of warfare and one benefit of vast government expenditures on warfare, according to some many scholars is that we get all these wonderful new technologies. We get spin-offs of government R&D that lead to valuable consumer products, government interstate highways being a great example, the interstate highway system was established by President Eisenhower to facilitate the movement of citizens throughout the United States or to facilitate commerce by allowing cargo to travel by truck rather than rail but was to facilitate the quick and easy mobilization of people and materials for war. Eisenhower as a general had seen Hitler's Autobahn system in Germany and marveled at the ability of the Germans to move armaments and soldiers quickly across the German state and he wanted the same kind of setup for America but people will argue, okay fine so the interstate highway system was designed to facilitate military transportation but so what, now we have it for civilian use and isn't that great. Radar, if you study this argument if you look at the history of technology and 20th century history more generally you often hear people argue that one of the great things to come out of World War II was the technology of radar. Now radar, of course the basic research on radar had been conducted long before in the late 19th century by a number of scientists including a doctor Hertz in Germany but it's true that during the late 1930s and early 1940s British and American scientists worked very hard to refine the technology to implement the technology and to make usable radar stations on the ground on airplanes, sonar technology sonar using the similar technology in boats and submarines and so it is argued we would not have the marvelous air transportation system that we have today if it hadn't been for the government developing radar to try to beat its enemies on the battlefield. I don't know what Mr. Hertz and these World War II scientists would have thought of TSA but that's a subject also for another day. And who can forget Tang? Tang, the instant breakfast drink. For years it was said that Tang was a product of the Apollo program. It turns out even NASA now admits that Tang had nothing to do with that Tang was created by a large food company and was used by astronauts but was not in any way created by NASA. So the argument in a nutshell that one hears from the defenders of war and the defenders of the military industrial complex is that war has some side benefits that are good for society. Not only does it help to mobilize all of society's resources in some important shared national purpose give a civic pride in the martial spirit of course through coercion and exploitation and abuse of course but it also gives us new technology and isn't that great. We can spend a lot of time going through examples further examples of technologies developed for military use. Some of them are obvious the atomic bomb which was research on which led to the development of nuclear energy for civilian use for generating electricity but also some sort of administrative improvements logistics, techniques for loading and unloading ships that were developed during World War II have now been adopted by commercial transportation companies. The whole discipline of operations research the systematic analysis of flows of materials through production stages and so forth was developed by economists and others during World War II and subsequently adopted by a number of large companies. A lot of these innovations come out of inventions come out of World War II. Computing, early digital computing devices were developed during World War II to help break the enigma code the Germans enigma code for example and then in the Cold War in the Cold War we got the first real computer the ENIAC world's first general purpose digital computer which was developed by military researchers not for any commercial application it was not designed to solve scientific problems or designed to help with commerce it was designed to improve the performance of battlefield artillery the reason those complex calculations were needed was to calculate the effectiveness of different kinds of artillery techniques but again moving to social science the whole discipline of game theory which is often used by business strategists today and a number of other social scientists for peaceful uses game theory has many weaknesses of course but these techniques were developed by researchers at the Rand Corporation and elsewhere during the Cold War operating on your taxpayer dollars so what can we say about this argument? I mean it is absolutely true that we do have a number of technologies that were enabled by public spending directed by the military establishment that's absolutely true is that an argument in favor of military spending or of a large military industrial complex I think the right, well of course the answer is no and there are a couple of different ways we can address this argument now one approach is to look at individual cases in a bit more detail and evaluate what kind of research was actually done what technologies were embraced by the government scientists what alternative technologies were available how efficient or effective was the work that was done relative to feasible alternatives and it turns out if one studies any of these cases in detail beyond the bumper sticker thanks to the government we have radar kind of approach the details are extremely messy and as we would expect from our general understanding of how efficient government is how well government functions we would find that one can easily articulate reasons why these programs did not work very well the technologies that were developed were highly inefficient relative to feasible alternatives the execution was not good there are a number of historical legacies of government investment in particular technologies that continue to haunt us today radar is an interesting example that commercial aviation after World War II was in many ways of course reliant on these advances in radar technology but there are a number of problems with the kind of radar implementations that were used problems that persist even until this day the U.S. I once did a study of the U.S. air traffic control system about 10 years ago and the U.S. air traffic control system is highly inefficient relies on very outdated antiquated technology that was essentially developed during World War II users of government developed radar have had a hard time adopting newer and improved technologies because they have huge investments in the government legacy version of radar there are a number of other cases like this that we can look at where we can poke holes in the particular arguments that are used to explain why these technologies are desirable but there's a much more basic theoretical problem with this kind of argument it is certainly true that in many cases the government spends money on building things and doing things that otherwise would not have been built or done is that an argument in favor of building or doing and of course just a few moments reflection will let you realize the answer is no think of the pyramids it's true that if there hadn't been a pharaoh with access to a huge supply of slave labor along with all sorts of other technological compliments architects and builders and stone masons and slave masters who could whip the slaves and so on a complex ecosystem of technological complementarities to use the modern jargon we wouldn't have the pyramids does that mean that the pyramids the creation of the pyramids was good for the people of Egypt of course it was a monument to the pharaoh and the pharaoh's own god-like position and so forth the government builds monuments to itself all over the place giant ugly statues and museums and so forth and you can say well gosh the private sector wouldn't have built the Lincoln Memorial well yes that's exactly right in other words the fact that something exists as the result of government expenditure is not an argument that it creates any sort of economic value moreover in a lot of these cases when the government spends money on X it may be creating something or building something that the private sector was already doing and the government sort of takes advantage of that and maybe steers it in a slightly different direction so at best government spending is harmless in this sense in the sense of determining what the output is because it's simply subsidizing the private money that would have been used to produce something with public money that produced the same thing or in most cases it makes us substantially worse off because it it leads to the creation of things that we otherwise wouldn't have and that we don't want that we don't want of course I'm not arguing that government spending is ever neutral but in terms of the specific technologies that we have government either co-opts existing technology or it changes the technology into something that the market would not have provided but which we would have preferred to have been provided by the market I mean you know President Obama used the internet and the internet is a great example there's a lot of literature on this I've written a little bit on this myself you know it's true that Al Gore notwithstanding right the government did play a substantial role in the design and infrastructure of the internet but that role was not all for the good there are a number of reasons why alternative private competing networks would have done a better job of creating a global information network than the government the one that the government created you know I need only call your attention to the famous fallacy of the broken window from given to us by Frederick Bastiat and popularized by Henry Haslett right you know the specific technologies that come out of wartime R&D bureaus are like the pain of glass in Bastiat's story right I mean we see them right and we say wow isn't it great that we have radar isn't it great that we have the internet isn't it great that we have the interstate highway system right but what we do not see what Bastiat called the unseen right is the technologies that we would have had if resources had not been taken from the public and used to favor government contractors and government connected scientists and so on we don't see the technologies we would have if the private sector had been allowed to produce them in the absence of a giant militaristic government now the history of government funded science is extremely interesting especially immediately after World War II. Key figure here is Vannevar Bush who was one of the leaders of the Manhattan Project later became director of the National Defense Research Committee during World War II and was director of the Office of Scientific Research and Development which later morphed into the National Science Foundation so Bush was a big advocate at the end of the war of creating a permanent peacetime government military research there's a lot of controversy among different government officials about what form this agency should take Bush wanted it to be organized through the universities where the government would simply fund research that professors would do at universities, others a major player was Senator Harley Kilgore of West Virginia wanted the government to actually do all the research itself in government funded labs. There's a very interesting discussion of all this in the book by the British scientist and historian Terrence Keely who some of you are familiar with who's one of the most important critics of government funded science as Keely described the origins of the National Science Foundation in his book The Economic Laws of Scientific Research for Kilgore this is Keely, he says for Kilgore Senator Kilgore the major purpose of the National Science Foundation was not the generation of new knowledge nice though that would doubtless be but the generation of trained scientists. Kilgore wanted to create a reserve of scientifically trained personnel who could be mobilized for strategic purposes. In other words ready for the government to call upon them to create technologies of war the National Science Foundation therefore was created in 1950 in the same year for the same reasons as the National Security Council so the NSF which funds a large amount of scientific research done at US universities was created not to advance knowledge per se but as part of the Cold War effort to beat the Soviets to dominate the globe and so on. So the National Science Foundation was part of the National Security apparatus in every important sense now there is some recognition of these problems in the literature very important historian named Paul Thorman has argued that government funding of science and especially in physics distorted scientific progress in physics and got scientists working on the wrong problems problems that the government wanted solved rather than problems that had the greatest potential for the creation of knowledge and benefits to society. Seymour Melman has argued that most of the military R&D spending during the Cold War simply crowded out private spending and that we have worse technologies and less technology today as a result of Cold War military spending on science and R&D and then we would have had as an alternative and let's think of it this way that most of the huge part of the scientific community during the 1950's and 1960's was essentially working for one client which had its own particular set of needs and this left these scientists and researchers ill prepared to deal with commercial clients who of course had a variety of different kinds of needs and wants making goods and services for consumers. So in short when we look at a company like Apple or Google or Facebook and we marvel at the innovation that these companies produce we recognize that these innovations are valuable and beneficial to society because they must pass a market test. No one can coerce you into buying Apple's products or some other company's products. These innovators must satisfy consumers and they must satisfy their suppliers of capital and so on. They have to produce goods and services that create value to consumers. The RAND Corporation and the Pentagon the National Science Foundation and so forth they do not face any kind of market test. The goods and services that they produce are valuable to the directors and valuable to certain congress people and they certainly do provide benefits to researchers in the form of higher pay access to bigger staffs lots of toys to play with and so forth but there's no market test that gives us any confidence that these innovations are creating anything of economic value. So remember to economists value is created by the introduction of goods and services that make consumers better off as demonstrated by consumers willingness to pay. The government can create lots of monuments whether they're Adam Bombs or statues in Washington DC but these do not create benefit to consumers they benefit the government they benefit certain scientists they certainly are not in the interest of society. Thank you very much.